John Hancock fund bundles alternative investments

JonKamp

--Offering features 14 underlying funds touching on a variety of investments, such as currency trades

--Hancock fund has regularly outpaced the average performance of its peer group, according to Morningstar

The John Hancock Alternative Asset Allocation Fund aim to guide investors off the beaten path to add some diversity to their portfolio, through investments like commodity bets and currency trades, by helping them avoid the daunting task of picking the right ones.

There are many funds focused on investments that go far beyond traditional equity and fixed-income holdings, including offerings from Manulife Financial Corp.
MFC, +0.81%
unit John Hancock. But the $181.6 million Alternative Asset Allocation Fund goes a step further by roping several funds together, with management help from an array of outside firms, in a fund-of-funds approach.

Some of the fund still focuses on fairly common areas, such as low-rated debt, but the overall strategy is to create a portfolio that has limited ties to broader-market movements.

"As a one-stop solution, we want to provide exposure to a broad range of alternatives," said Steve Medina, a senior portfolio manager at John Hancock who co-manages the Alternative Asset Allocation fund.

Hancock launched the product in 2009 and began actively marketing it to clients in early 2011. Morningstar Inc. gives it four of a possible five stars.

Altogether, there are 14 underlying funds touching on a variety of alternative investments. Most of these funds are John Hancock offerings, and most have outside management. Wading through an array of alternative investments is tricky for any single portfolio manager, let alone individual investors, Mr. Medina said. Even within one broad area, such as commodities, products like oil and gold have very different risk and return characteristics, he noted.

"There's a lot for an adviser to get their arms around here," he said.

According to recent records, the fund was most heavily invested in the John Hancock Currency Strategies Fund and the John Hancock Global High Yield Fund, with 15% allocations in each one. The currency fund, managed by First Quadrant, typically puts 80% of assets in currency forwards and other currency transactions. The High Yield Fund, managed by Stone Harbor Investment Partners, mainly invests in U.S. and foreign fixed-income securities.

The Alternative Asset Allocation Fund has delivered total returns of 5.6% so far this year, which is more than double the average in a broader category of similar funds, according to Morningstar Inc. The John Hancock offering has also outperformed its peer group on a one- and three-year basis.

That peer group is the fastest growing among alternative-investment categories tracked by Morningstar. Investors are "looking for an alternative source of returns and a way to diversify the risks of stocks and bonds," said Nadia Papagiannis, director of alternative fund research at Morningstar.

Because these funds often require thick layers of management to oversee different types of sometimes-exotic investments, they can sport high fees. Still, the Hancock fund's expense ratio is toward the lower end of the spectrum in its category, Ms. Papagiannis said.

Since many of these funds are new, it will take time to really show during a market downswing that they aren't tethered to common equity and debt markets, Ms. Papagiannis said. "For the multi-alternatives, that's when they'll prove their worth," she said.

Since its inception, the Hancock fund has significantly lagged behind returns on the Standard & Poor's 500 index. But instead of trying to compete on that level, the fund is aiming to give investors a vehicle for a portion of their holdings to guard against volatility in the broader market.

Mr. Medina highlighted some evidence the fund can indeed help investors play defense. In September of last year, his fund decreased 2.5% compared with a 7.2% slide in the S&P 500, for example. While guarding against market declines, the fund also seeks to grow better than most traditional, low-volatility funds when the market is surging.

"We do not want to be a glorified money-market fund," Mr. Medina said.

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